Corporate Transparency Act

Understanding the Corporate Transparency Act (CTA)

Designed to enhance transparency and combat illicit financial activities, the CTA requires entities to report the individuals with ownership and controlling stake to the federal government. In this article, we will dive into the specifics of the Corporate Transparency Act, exploring what it entails, its objectives, and, most importantly, how it will affect your business.

What Is It and What Does It Mean For Your Business?

The Corporate Transparency Act (CTA) is a federal law enacted in 2021 as part of the National Defense Authorization Act. Its primary objective is to prevent money laundering, terrorism financing, and other illicit financial activities by promoting transparency within corporate structures.

What Does the Corporate Transparency Act Do?

The Corporate Transparency Act aims to achieve several key objectives, including:

• Combatting Illicit Financial Activities: By requiring beneficial ownership reporting, the CTA seeks to deter criminals from using anonymous entities to conduct illegal financial transactions. This increased transparency helps law enforcement agencies identify and investigate suspicious activities more effectively.
• Enhancing National Security: The CTA contributes to national security by providing valuable information to intelligence agencies, enabling them to detect and combat threats from illicit financial networks. By closing loopholes that previously allowed for anonymous ownership, the Act improves the ability to identify potential risks and take appropriate action.
• Protecting Legitimate Businesses: While the Corporate Transparency Act imposes new reporting obligations, it also protects legitimate businesses from unfair competition. By minimizing the use of shell companies for illegal purposes, the Act promotes a level playing field and fosters an environment of trust and integrity in business transactions.

How Does the Corporate Transparency Act Accomplish its Goals?

Beneficial ownership reporting is a vital tool for achieving the CTA's objectives. Beneficial owners are individuals who have substantial control over or receive substantial economic benefits from a legal entity. By revealing the individuals behind these entities, it becomes more challenging for criminals to hide illegal activities behind anonymous shell companies.

For legitimate businesses, beneficial ownership reporting promotes a more transparent and trustworthy business climate. It helps prevent unfair competition from entities engaging in illicit activities, creating a more level playing field for all businesses. In this way, the CTA, through beneficial ownership reporting, fosters transparency, enhances security, and safeguards the integrity.

How Does the Corporate Transparency Act Impact Your Business?

If your organization is registered to operate in the United States, it's essential to understand how the Corporate Transparency Act will affect your operations. Here are some key points to consider:

Reporting Requirements

Entities that are not exempt from reporting beneficial ownership information, referred to as “reporting companies,” must meet reporting requirements established by the CTA. This includes most organizations registered to operate in the US. Reporting companies are required to submit specific details about legal entities, beneficial owners, and, in some cases, company applicants to FinCEN, a bureau of the US Department of Treasury responsible for combating financial crimes.

Timeframes for Initial Reporting

The reporting requirement came into effect on January 1, 2024. FinCEN began accepting beneficial ownership information reports on that date. Any company created or registered to do business in the US that meets the definition of a reporting company and is not exempt from that definition will be required to file before January 1, 2025.

Any company created or registered to do business in the US in 2024 will have 90 calendar days from the date it receives actual or public notice that the creation or registration of the reporting company is effective while companies created or registered after 2024 will have 30 days.

Updates to Reported Information

In addition to initial reporting, there is also an obligation to keep the information updated. Changes to previously reported information must be reported to FinCEN within 30 days after a change occurs. This includes any changes in the beneficial owners or their information, such as a change in address or contact details. The onus is on the reporting companies to ensure their information is current and accurate.

Examples of changes that would require an updated beneficial ownership information report include:

• Any change to the information reported for the reporting company, such as registering a new business name.
• A change in beneficial owners, such as a sale that changes who meets the ownership interest threshold of 25 percent or which changes the individuals with substantial control.
• Any change to the entity’s information or any previously reported individual's name, address, or unique identifying number previously provided to FinCEN. If a beneficial owner obtained a new driver’s license or other identifying document that includes a changed name, address, or identifying number, the reporting company also would have to file an updated beneficial ownership information report with FinCEN, including an image of the new identifying document.

Exemptions from Reporting

While the CTA broadly applies to most organizations registered to do business in the US, there are specific exemptions to consider. For instance, more heavily regulated entities, such as banks, credit unions, investment companies, and entities already required to report certain information to the federal government are exempt from the CTA's reporting requirements. (Read the full list below.) Each entity must review the CTA and its regulations to determine if they fall under an exempt category. All organizations should consult with their legal counsel to understand their reporting obligations and possible exemptions under the CTA.

Penalties for Failing to Properly Report Beneficial Ownership Information

Failure to meet reporting obligations under the CTA can result in significant penalties. These penalties may include fines of $500 per day, up to $10,000, or even criminal charges. Therefore, businesses must ensure timely and accurate reporting.

Understanding Beneficial Ownership Under the CTA

A beneficial owner is any person with at least 25% ownership or who has significant control over the organization's operations. While the ownership standard is mostly intuitive, the substantial control concept is more nuanced. In general, an individual has substantial control if they fall into any of the below categories:

1. Senior Officer - Any individual holding the position or exercising the authority of an Executive Director/CEO, President, CFO, General Counsel, COO, or any other officer, regardless of title, who performs similar functions as these officers.
2. Appointment or Removal Authority - Anyone able to appoint or remove any senior officer or a majority of the board of directors or similar body.
3. Important Decision-Maker - Anyone who directs, determines, or has substantial influence over important decisions made by the organization, including decisions regarding the organization's
   1. Business, such as:
      • Nature, scope, and attributes of the business
      • The selection or termination of business lines or ventures or geographic focus
      • The entry into or termination, or the fulfillment or non-fulfillment, of significant contracts
   2. Finances, such as:
      • Sale, lease, mortgage, or other transfer of any principal assets
      • Major expenditures or investments, issuances of any equity, incurrence of any significant debt, or approval of the operating budget
      • Compensation schemes and incentive programs for senior officers
   3. Structure, such as:
      • Reorganization, dissolution, or merger
      • Amendments of any substantial governance documents of the reporting company, including the articles of incorporation or similar formation documents, bylaws, and significant policies or procedures
4. Individuals with any other form of substantial control over the organization. - Control exercised in new and unique ways can still be substantial. For example, flexible corporate structures may have different indicators of control than the indicators included here.

Exceptions to Beneficial Ownership

There are exceptions to the beneficial ownership definition which serve to limit the number of individuals that must be reported. The CTA makes five exceptions from the beneficial owner definition:

• Minors
• Nominees, intermediaries, custodians, or agents
• Employees
• Inheritors
• Creditors

Note that there are specific criteria a beneficial owner must meet to qualify for an exemption. For example, a person is only considered an employee in the BOI reporting context if they meet the following requirements:

• They’re subject to the control and will of the employer, who has the power to discharge them.
• Their economic benefits or substantial control over the company are derived only from their employee status.
• They don’t serve as the company’s senior officer.

It’s also worth mentioning that special rules might apply to some exceptions. For example, the fact that you don’t need to report a minor’s information doesn’t mean you can completely exclude them from the report.

Instead, you must include the identifying information of a minor’s parent or legal guardian in the report. When the minor reaches legal age, you must submit an updated BOI report that includes their information.

The CTA requires companies to list all beneficial owners and provide their identifying information to FinCEN.

Types of Information Required for Reporting

Organizations should be prepared to provide specific details about their legal entities, beneficial owners, and, in some cases, company applicants when filing.

Reporting Company

• The legal entity’s full name
• Any trade name or “doing business as” (DBA) name
• Complete current US address
• State, Tribal, or foreign jurisdiction of formation (Foreign reporting companies must also list the state or tribal jurisdiction where they were first registered to do business in the US.)
• Internal Revenue Service (IRS) Taxpayer Identification Number (TIN) (including an Employer Identification Number (EIN))
  • If a foreign reporting company has not been issued a TIN, report a tax identification number issued by a foreign jurisdiction and the name of such jurisdiction.

Beneficial Owner(s)

Note that company applicant information is generally only required for organizations formed after 2023.

1. Full legal name
2. Date of birth
3. Complete current address - Report the individual’s residential street address, except for company applicants who form or register a company in the course of their business, such as paralegals. For such individuals, report the business street address. The address is not required to be in the United States.
4. Unique identifying number and issuing jurisdiction from, and image of, one of the following non-expired documents:
   • US passport
   • State driver’s license
   • Identification document issued by a state, local government, or tribe
   • If an individual does not have any of the previous documents, a foreign passport

All of the same information reported about a beneficial owner must also be reported about company applicants for most entities formed after December 31, 2023. A company applicant refers to the individual(s) directly involved in physically or electronically filing the documents to create or register a legal entity.

There are two categories of company applicants – the “direct filer” and the individual who “directs or controls the filing action.” For example, you may be the direct filer company applicant if you completed the paperwork to form your organization. If you worked with a third party to complete the filing, that person may be the direct filer company applicant while you would be the company applicant directing or controlling the filing action.

Preparing for Beneficial Ownership Reporting

Organizations should take proactive steps to prepare themselves to meet beneficial ownership reporting requirements. Here are some practical instructions to guide you through the process:

1. Internal Review: Conduct an internal review of your company's structure and ownership hierarchy to identify all potential beneficial owners.
2. Documentation Gathering: Collect the necessary documentation and information for each beneficial owner and company applicant, such as identification documents, proof of address, and relevant corporate records.
3. Centralized Record-Keeping: Establish a centralized system or database to record and maintain accurate beneficial ownership information. The Records Manager software included as part of our Software Suite offers an ideal solution to this challenge, enabling you to track ownership across all of your entities.
4. Regular Updates: Ensure your records are up-to-date by periodically reviewing and verifying the provided information. Records Manager does what spreadsheets can’t - track dynamic ownership and controlling stakes across multiple entities at once.
5. Compliance Training: Train relevant staff members on the importance of reporting accurate beneficial ownership information and provide guidelines for ongoing compliance. Granting your entire team access to the Records Manager software module is a great way to get started.

By following these steps, organizations can streamline their reporting processes and demonstrate their commitment to transparency and compliance.

Corporate Transparency Act Exemptions

While many businesses must comply with the Beneficial Ownership Reporting requirements laid out by the CTA, specific exemptions relieve certain organizations from filing. There are 23 types of entities that are exempt from reporting:

1. Securities reporting issuer
2. Governmental authority
3. Bank
4. Credit union
5. Depository institution holding company
6. Money services business
7. Broker or dealer in securities
8. Securities exchange or clearing agency
9. Other Exchange Act registered entity
10. Investment company or investment adviser
11. Venture capital fund adviser
12. Insurance company
13. State-licensed insurance producer
14. Commodity Exchange Act registered entity
15. Accounting firm
16. Public utility
17. Financial market utility
18. Pooled investment vehicle
19. Tax-exempt entity
20. Entity assisting a tax-exempt entity
21. Large operating company
22. Subsidiary of certain exempt entities, including those described in exemptions 1, 2, 3, 4, 5, 7, 8, 9, 10, 11, 12, 13, 14, 15, 16, 17, 19, or 21 above.
23. Inactive entity

It is essential to note that while these exemptions exist, businesses should carefully review their eligibility for each exemption category and consult legal counsel if needed.